2016 (10) TMI 1211 - AT - Income Tax

Adjustment for the value of corporate guarantees received by the taxpayer form its AEs - Held that - Corporate guarantee provided by the assessee gives the benefit to the AE and such benefit was passed on by the assessee to the said AE and therefore should have been charged at ALP. Accordingly, we set aside this issue to the record of the A.O./TPO to recomputed the ALP by considering the arm s length guarantee fees at 0.5% and further by providing appropriate adjustment for corporate guarantee received by the assessee from its arm s length. TP Adjustment in respect of the loan provided to AE - Held that - The transaction of loan/advance is clearly defined in Section 92B(1) as international transaction being lending or borrowing money or any other transaction having bearing on the profits, income, loses or assets of enterprises. We find that the Tribunal has been taking a consistent view on this issue as far as the transaction of lending money to the AE being international transaction however, the arm s length rate has been accepted by the Tribunal by considering LIBOR rate as the transaction is in foreign currency. Therefore interest rate prevailing in the economic geography of AE shall be taken into consideration. Accordingly, we direct the Assessing Officer / TPO to apply LIBOR 2% as ALP. TP Adjustment in respect of outstanding receivable from the AE for abnormal period - Held that - This issue has been considered and decided by this Tribunal in a series of decisions including the decision in the case of M/s. Dell International Services India Pvt. Ltd. Vs. JCIT 2016 (6) TMI 1275 - ITAT, BANGALORE - we set aside this issue to the record of the A.O./TPO with the direction to redo the determination of ALP in respect of providing software development services by considering the proper working capital adjustment in comparable price. In case after giving the necessary adjustment the international transaction of the assessee is found at arm s length then there is no question of separate adjustment on account of allowing credit period on receivable from the AE. Exclusion of expenses from export turnover while computing the deduction under Section 10A - Held that - The Hon ble Karnataka High Court in the case of CIT v M/s Tata Elxsi Ltd. & Others 2011 (8) TMI 782 - KARNATAKA HIGH COURT had held that while computing the exemption u/s 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded from the total turnover in the denominator. Setting off unabsorbed depreciation against the profits of the eligible units - Held that - Following the latest judgment of the Hon ble High Court in case of M/s Yokogawa India Ltd 2011 (8) TMI 845 - KARNATAKA HIGH COURT as well as Co-ordinate Bench decision in case of M/s Safran Aerospace India Pvt. Ltd. 2015 (1) TMI 773 - ITAT BANGALORE we decide this issue in favour of assessee and direct the AO to allow the claim of deduction u/s 10A of the IT Act, without setting off of brought forward losses/unabsorbed depreciation Disallowance of lease charges on the ground of unascertained liability as well as non-deduction of taxes at source under Section 40(a)(ia) - Assessing Officer found that this amount of ₹ 6,41,61,438 has been added back in the computation under regular provisions of Act as an uncertained liability but was not added back while computing book profit under Section 115JB - Held that - . The concept of disclosure in notes to Accounts would amount to disclosure in the financial statement is applied if an item of income or expenditure is required to be part of profit and loss account as per Part II of Schedule VI of the Companies Act but the same was not disclosed in the profit and loss account and has been disclosed in thenotes forming part of financial accounts. Therefore the said disclosure in the notes to accounts would be treated as disclosure of particular income or expenditure as the case may be in the profit and loss account for the purpose of computation of book profit under Section 115JB of the Act. In the case on hand since this was not a permissible provision as per Accounting Standard therefore it was not required to be disclosed in the profit and loss account and accordingly the disclosure made in notes to accounts would not change the nature of provision as accrued expenditure. In view of the facts and circumstances as discussed above, we do not find any error or illegality in the orders of the authorities below on this issue. Brought forward losses or unabsorbed depreciation whichever is lessor has to be allowed as deduction - Held that - Despite the directions of the DRP, the Assessing Officer while passing the final assessment order has not allowed this claim of the assessee which is a gross disrespect and derogation on the part of the Assessing Officer to the binding orders/directions of the DRP. Accordingly, we direct the Assessing Officer to recompute the book profit under Section 115JB as directed by the DRP. We make it clear such a conduct of the Assessing Officer is unwarranted and depreciable and goes even against the interest of revenue being a self inflecting injury. Even if the directions of the DRP are not acceptable to the Assessing Officer, the remedy is to file the appeal after passing the final order in terms of the directions of the DRP

Summary

Issues Involved:
1. Transfer Pricing Adjustment on Corporate Guarantees
2. Transfer Pricing Adjustment on Outstanding Dues from Associated Enterprises (AEs)
3. Transfer Pricing Adjustment on Loans Advanced to AEs
4. Admissibility of Additional Grounds
5. Computation of Book Profit under Section 115JB
6. Deduction under Section 10A
7. Adjustment for Amalgamation Loss
8. Disallowance of Lease Charges
9. Computation of Interest under Section 234C

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment on Corporate Guarantees:
The assessee argued that corporate guarantees provided to AEs should not be considered as international transactions. The Tribunal noted that prior decisions consistently held corporate guarantees as international transactions under Section 92B(1). The Tribunal directed the Assessing Officer (AO)/Transfer Pricing Officer (TPO) to recompute the Arm's Length Price (ALP) considering a 0.5% guarantee fee and adjust for corporate guarantees received by the assessee.

2. Transfer Pricing Adjustment on Outstanding Dues from AEs:
The Tribunal observed that allowing a credit period on receivables from AEs is part of the main international transaction of providing services. The Tribunal directed the AO/TPO to redo the ALP determination by considering proper working capital adjustments in comparable prices. If the transaction is found at arm's length after adjustments, no separate adjustment for credit period is necessary.

3. Transfer Pricing Adjustment on Loans Advanced to AEs:
The Tribunal held that lending money to AEs is an international transaction under Section 92B(1). The Tribunal directed the AO/TPO to apply LIBOR + 2% as the ALP for interest on loans advanced to AEs, aligning with consistent Tribunal views.

4. Admissibility of Additional Grounds:
The Tribunal admitted additional grounds related to transfer pricing adjustments as they were alternative pleas to existing grounds. However, fresh grounds regarding amalgamation loss and TDS credit, not raised before the Dispute Resolution Panel (DRP), were not admitted and were directed to be examined by the DRP or AO.

5. Computation of Book Profit under Section 115JB:
The Tribunal directed the AO to recompute book profits by adopting the figure of brought forward loss as on 1.4.2008, as per DRP's direction. The AO's failure to follow DRP's direction was criticized.

6. Deduction under Section 10A:
The Tribunal directed the AO to exclude expenses from both export turnover and total turnover while calculating deduction under Section 10A, following the Karnataka High Court's decision in CIT v M/s Tata Elxsi Ltd.

7. Adjustment for Amalgamation Loss:
The Tribunal set aside the issue to the DRP for consideration and adjudication regarding the adjustment of amalgamation loss while computing book profit under Section 115JB.

8. Disallowance of Lease Charges:
The Tribunal upheld the AO's disallowance of lease charges, finding that the provision for future rent did not pertain to the year under consideration and was not a present obligation as per Accounting Standard 29.

9. Computation of Interest under Section 234C:
The Tribunal noted that the computation of interest under Section 234C is mandatory and consequential.

Conclusion:
The Tribunal's judgment addressed multiple complex issues related to transfer pricing adjustments, computation of book profits, and deductions under the Income Tax Act. The Tribunal provided clear directions for recomputation and further examination by the AO/TPO and DRP, ensuring adherence to legal precedents and accounting standards.